WHAT TO WATCH: ‘Brexit’ Vote Splits Ruling Party, Weighs on GBP
(Bloomberg) -- PM David Cameron reaching a deal with EU leaders and the announcement of the referendum date for June 23 have put the Brexit prospect on investors’ calendars.
- Uncertainty around the result may cloud the outlook for the British economy and weigh on U.K. assets, after several govt ministers, the mayor of London, Boris Johnson, and a cross- party group have said they will campaign to leave
- The pound is so far the biggest loser, falling as much as 1.6% Monday to 3-week low
- WHAT’S THE LATEST?
- Cameron is due to address parliament at 3:30pm; he said Sunday that the U.K. is safer and stronger within the EU; Chancellor George Osborne also indicated his backing for continued membership
- Boris Johnson, mayor of London and a popular politician in Cameron’s Conservative party announced he will campaign for the country to leave
- Several of the party’s govt ministers including Justice Secretary Michael Gove and Work and Pensions Secretary Iain Duncan Smith also said they will back the leave campaign
- Nicola Sturgeon, Scottish First Minister, said she will campaign for remaining in the EU on a different set of issues than Cameron and warned a vote to leave without Scotland’s backing “would trigger a demand for a second Scottish referendum”
- Cameron’s ‘‘failure" to secure anything more than tinkering in his negotiations was criticized in an editorial in The Sun on Sunday newspaper, on the day the prime minister appealed to its readers to vote to stay, saying they will play a key role in the vote
- Business lobby TheCityUK welcomed the announcement of a date for the vote
- HOW WILL MARKETS BEHAVE?
- The pound has dropped more than 1% against both the dollar and the euro with a number of analysts suggesting the prospect of the vote will continue to weigh on the country’s currency in the months ahead
- GBP/USD 3-mo. and 6-mo. implied volatility is rising
- Sterling IG corporate bonds were already trading at their widest ever relative to their European peers and analysts including Hamish Pepper, Zoso Davies and Antonio Garcia Pascual at Barclays say financial bonds could widen further if the probability of an exit increases
- Any further negative sentiment after this deal could increase the perceived chance of exit, leading to more downward pressure on sterling, rate, equities and credit markets, AXA IM economist David Page writes
- WHAT’S THE LIKELY VOTE OUTCOME?
- Opinion polls have been mixed with the latest Survation poll showing 19% are still undecided and among those who are aware of Cameron’s renegotiation 22% are undecided; 48% of all those surveyed want to stay and 33% to leave
- Nearly four-fifths (78%) of investors polled by RBS expect the U.K. to stay in the EU
- John Gieve, a former deputy governor of the BOE, sees a 30% chance the U.K. votes to leave, while Berenberg analysts lifted the likelihood to 35% vs 30% at the end of January and Nordea see a 40% chance
- Johnson’s decision can only raise the risk of a vote for leave and could draw other high-profile supporters into the Brexit camp, Deutsche Bank’s George Buckley writes
- There’s a risk the early stages of the U.K. referendum campaign become dominated by the migration issue, given EU talks on the issue in March, JPMorgan’s Malcolm Barr says, adding that makes him more nervous about the outcome of the vote
- Bookmakers Ladbrokes and William Hill cut their odds of a vote to leave after Johnson’s announcement
- WHAT HAPPENS IF THE REMAIN CAMP WINS?
- GBP would likely rally perhaps as much as 5% as the political uncertainty premium is completely removed, Nomura analyst Jordan Rochester writes in client note
- There could be a potential repricing of the first BOE rate rise, adding to support for sterling
- WHAT HAPPENS ON A BREXIT?
- The U.K. will have up to two years to negotiate its exit
- If the referendum goes against Cameron, he may lose his job, Berenberg’s Holger Schmieding writes in client note
- In the interim a Scottish referendum on leaving the U.K. to stay in the union is probable, Nicola Sturgeon, Scottish First Minister has said
- The BOE may tighten policy later than would otherwise be the case, Barclays analysts wrote
- Nomura’s Rochester says the pound could fall a further 15%, potentially sparking recession
- Axa’s Page says the impact on GDP could range from 2% to 7%, making he referendum the single biggest economic event for the U.K. for the next four months at least
- UBS economist David Tinsley says the long-term impact on the economy would depend on the nature of the exit and how much access to EU markets the county keeps after the negotiations, as will the impact on migration
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People David Cameron (United Kingdom of Great Britain and Northern Ireland)
Antonio Garcia Pascual (Barclays PLC)
Boris Johnson (Greater London Authority)
David Page (AXA Investment Managers UK Ltd)
David Tinsley (UBS Asset Management Japan Ltd)
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